Mr. Chair, ladies and gentlemen, Mr. Poissant, good morning. Thank you for inviting us to your committee to share with you our observations on debt in the agricultural sector.
My name is Michèle Lalancette. I am the mother of two wonderful children, a proud farmer from Saguenay—Lac-Saint-Jean, and president of the Fédération de la relève agricole du Québec, or FRAQ. I have been involved in agricultural renewal for about 10 years. I do so with passion for young people like myself, who dream of making a living in agriculture.
With me is Philippe Pagé, the federation's interregional coordinator. He grew up on a hog farm himself, in Saint-Camille, in the Eastern Townships.
One of the reasons that motivated us to appear before you today is that we would like to describe for you the issue of debt from the perspective of Quebec's young farmers. First of all, in our opinion, agricultural businesses must be transferable to the next generation so that it is possible to start a new business and make a living from it. Young farmers must also have access to the assets.
Before I go into greater detail on this, I would like to tell you some more about the group I represent.
The organization known as FRAQ brings together young Quebecers from 16 to 39 years of age with a common interest in agriculture. We have more than 1,600 members all over Quebec, from the Outaouais to the Magdalen Islands. FRAQ is the place where young farmers and those with a passion for agriculture can meet and share views.
FRAQ operates mostly like a drive belt that links the aspirations of the new generation of young farmers to decision-makers. Its mission is to safeguard the interests of young farmers, to improve their operating conditions, such as in farm transfers or start-ups, and to provide them with information about existing programs in a host of areas, such as income stabilization, start-up assistance and so on. It also has a mission to attract the younger generation to agriculture.
As I mentioned at the outset, we are here today to discuss with you the importance of the prudent use of debt in the transfer and start-up of agricultural businesses, as well as access to the assets.
Let us start with farm transfers and start-ups.
Debt is not a bad thing in itself. After all, it is what allows our young farmers to access capital, allowing them to acquire or start their agricultural businesses. Debt can therefore serve as a lever to improve a farm's viability and its ability to be passed onto the next generation.
Often, the sellers, the people who want to transfer their farms, are those that set the transaction in motion. Clearly, there has to be something in it for them in order for the transfer to be mutually beneficial. So, what do the sellers have left after the transfer? What can actually motivate them to transfer their farms?
In farm transfers, we know that a large part of the transaction happens because of a gift, since a huge amount of capital needs to be invested. Despite the gift, if the business is highly indebted, the capital that the young farmer has to invest remains very high. That often makes the transfer impossible. In addition to the debts that sellers have to repay, they have to make sure that they have enough for their retirement. That is without counting the taxes to be paid. We can come back to them later. The bottom line is that young farmers have to invest major capital and that is very difficult. In some cases, after buying a farm, or having one transferred, young farmers start off their careers in terrible debt, even before any investments in the business are made.
This requires us to come up with new ways of making transfers. For example, we are seeing the seller-lender formula more and more, where the sellers themselves back the loans to the young farmers. The formula ensures that the seller receives a kind of long-term rental income.
As part of our 2015 brief on the aspirations of young farmers, we conducted a simulation. We calculated that the percentage of the value of the assets taken up by debt averages between 16% for large farms and 38% for a sheep farm, for example.
Once the debts have been repaid, sellers have little money left to retire on in certain cases, especially when their are two owners.
As the farmers’ retirement depends on selling their businesses, a number of them are tempted to dismantle them.
Still using the simulation we conducted for our 2015 brief, the total amount that the young farmer is able to pay the seller is sometimes even less than the company’s debts. So the seller will still have debts to pay once the business is transferred.
The stumbling block at the moment is the perpetual refinancing when businesses are transferred. The sale is made, the young farmer has to go into debt to the bank, and the same thing happens 35 years later. Basically, the only ones that profit are the financial institutions.
Debt must be limited.
With business loans, the economic models have to be able to withstand a potential interest rate rise of, say, 0.5% to 1.0%. The responsibility belongs to everyone. Producers and the banks are actually partners in this case. Too heavy a debt load inhibits potential transfers and leads to the farms being dismantled.
With the mortgages on single-family homes, the legislation has recently been updated to limit the term of loans to 30 years. Similar legislation should be considered for our farm organizations. To avoid too great a debt burden, it is important to limit the term of loans for land purchase. We do not want to see loans extending over several generations because that would effectively mortgage future generations, as well as help to increase the price of the asset. Basically, that is the only effect it would have.
As I was saying earlier, the seller-lender formulas are very successful at the moment. That model should be used more. It provides sellers with security and tax advantages. It also encourages sellers to bring the younger generation into the picture more quickly.
One intriguing initiative would be an interest rebate when the seller-lender formula is applied to assets transferred to younger farmers, whether they are related or not. The rebate could be supported by a government program or a tax credit.
Debt is positive if it creates wealth, but it is an obstacle to transferring agricultural concerns if it is too high. It’s all about balance. Nothing is black or white; there is a lot of grey.
In order to be in control of their circumstances, young farmers must have access to assets and must own them. Land ownership allows for loans and for it to be used as a lever to develop the business. By way of comparison, I would say that the same principle applies when homeowners use their equity to get a loan in order to improve their property and increase its value. Tenants, who do not have that lever, do not have the same motivation. History tells us that ownership is a positive factor in economic development.
About three weeks ago, officials from Farm Credit Canada (FCC) appeared before you. They told you about what they can do in terms of loans and about the range of their financial products. However, FCC and other financial players can only react to market needs. As elected officials and members of the committee, you can be proactive by enacting robust legislation to protect our agricultural industry.
Land hoarding is a major constraint on property ownership and, therefore, on credit. Land values increased by almost 800% between 1990 and 2014. This increase is a huge obstacle to starting and transferring farms. In the long term, it is harmful to agricultural entrepreneurship.
In terms of cost, land is a producer’s principal tool and principal investment. Imagine if the price of buildings and rents increased at the same rate. Imagine the effect that would have on SMEs like corner stores and hair salons.
At the moment, a good number of entrepreneurs starting out prefer to rent land because they do not have the means to buy it. If this situation continues, people wanting to transfer their farms will only be able to sell them to conglomerates, to integrators. Or they will have no other choice but to dismantle their operations.
Renting can be a solution in some business strategies, but companies like PANGEA, as a random example, are presently trying to have us believe that we can no longer have access to the land and that renting it is the only possibility open to us.